Cadbury shares have dipped 2.5p to 774.5p in a rising market following Kraft's disppointing third quarter announcement last night.

Kraft of course has made an approach to the UK chocolate maker, and has to make a firm bid by November 9. Itts current cash and share offer is worth around 732p, but will fall if Kraft's shares react badly this afternoon to the company's trading news.

Cadbury's shares have been buoyed recently by hopes that Kraft may raise its offer to at least 800p a share - with optimists expecting perhaps 850p. But some believe that may now look a bit toppy, and point to some cautious comments by the US company. Kraft said it would take a "disciplined" approach to the offer, based on accretion to earnings per share in year two; return on investment well in excess of the cost of capital; and thirdly, maintaining an investment grade credit rating and its dividend. Analysts at JP Morgan said:

We now assume a lower price on lack of competing bids, lower synergy assumptions, and our growing belief Kraft could walk away (and come back only a year later when investors would have a better sense of [Cadbury's] Vision into Action's true potential).

We doubt Kraft will go over 780p. Such an offer with only a 30% stock component may be enough.

However Panmure Gordon was more convinced Kraft could offer more after last night's comments from the US group:

Apart from the usual bluster from Kraft about not over-paying, the only real new news was that Kraft has raised $9bn of bridge financing, which is enough to raise the cash element of the bid from 300p to 400p as we have previously suggested.

It is fair to say there is little point in it bidding aggressively against itself, until it is clear whether any other bidders will emerge. We believe Kraft and Cadbury are still far apart on valuation, so the offer when it comes will be hostile. Kraft can always increase its offer at a later date, but Kraft needs to be careful not to alienate Cadbury shareholders with an excessive low opening offer. The current terms are worth 732p a share (before the expected fall in Kraft's shares today), which equates to 19.6 times PE and 17.2 times PE for 2009 and 2010 respectively. This is barely a premium to the global food sector, and we feel would quite rightly be rejected by Cadbury shareholders. We continue to see downside if a deal does not go through of 700p, far higher than some suggestions that Cadbury would fall back to 600p.

And Cazenove commented:

We continue to expect Kraft to put forward a firm offer for Cadbury before the 9 November put up or shut up deadline. We maintain our fair value range of 788p-873p and anticipate a greater proportion of cash in the part-cash and part-Kraft shares structure of the proposal (previously 40% debt and 60% equity-financed). We continue to believe speculation well above the top-end of this range is very optimistic in the absence of any counter-bid.